--- title: "If Walsh is elected chairman, will the Federal Reserve \"exchange interest rate cuts for balance sheet reduction\"?" type: "News" locale: "en" url: "https://longbridge.com/en/news/274433987.md" description: "The discussion of Waller's return to the Federal Reserve has raised concerns about its reduction of a $6.6 trillion balance sheet. The market speculates that Waller may quickly take action to reduce asset size, leading to an increase in long-term U.S. Treasury yields, a stronger dollar, and a decline in gold and silver prices. Waller has been critical of the Federal Reserve's balance sheet expansion, which could affect long-term interest rates and global financial markets. Trump had instructed the government to control the purchases of mortgage-backed securities by Fannie Mae and Freddie Mac to help manage costs for homebuyers" datetime: "2026-02-01T23:15:03.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/274433987.md) - [en](https://longbridge.com/en/news/274433987.md) - [zh-HK](https://longbridge.com/zh-HK/news/274433987.md) --- > Supported Languages: [简体中文](https://longbridge.com/zh-CN/news/274433987.md) | [繁體中文](https://longbridge.com/zh-HK/news/274433987.md) # If Walsh is elected chairman, will the Federal Reserve "exchange interest rate cuts for balance sheet reduction"? According to the Zhitong Finance APP, during much of the time that Trump has been considering candidates for the next Federal Reserve chair, the focus of debate in the market has been whether his chosen candidate will significantly lower interest rates as he hopes. Now, with his selection of former Federal Reserve Governor Kevin Warsh—an economist known for his fierce criticism of the Fed and views on monetary policy—the debate has suddenly shifted from short-term rates to the Federal Reserve's $6.6 trillion balance sheet. **For years, Warsh has publicly criticized his former colleagues, accusing them of allowing bank assets to balloon, which has fueled market speculation that he might quickly take action to reduce the asset size. This speculation pushed long-term U.S. Treasury yields higher last Friday, strengthened the dollar, and caused gold and silver prices to plummet.** Zach Griffiths, head of investment-grade and macro strategy at CreditSights, stated, “He is very critical of the Fed's balance sheet expansion.” Warsh's view on the Fed's excessive intervention aligns with that of U.S. Treasury Secretary Scott Pruitt, who hopes to completely reverse this trend and push for other reforms. However, this is no easy task, as it would not only directly affect long-term rates but also impact the crucial global financial lending market. **According to market trends, under Warsh's leadership, if the Fed's measures to reduce the balance sheet are approved by decision-makers, it could lead to a contradiction with the goal of lowering long-term borrowing costs.** This could force the U.S. Treasury or other U.S. agencies to become more involved in market management, and as total borrowing demand continues to grow, along with U.S. debt exceeding $30 trillion, the difficulty of market management also increases. As early as January, Trump instructed government-controlled Fannie Mae and Freddie Mac to purchase $200 billion in mortgage-backed securities to help control costs for potential homebuyers. Greg Peters, co-chief investment officer of fixed income at PGIM and a member of the Treasury Borrowing Advisory Committee, said, “If you believe Warsh, he doesn’t like to compress yields through balance sheet expansion, which means the responsibility falls on the Treasury.” The committee consists of dealers, investors, and other market participants. Meanwhile, Warsh might argue that by tightening financial conditions and reducing the balance sheet size, the Fed would have room to further lower the benchmark interest rate. Federal Reserve Governor Stephen Moore (appointed by Trump) stated in an interview last Friday, “In theory, if you adhere to the principle of minimizing the Fed's intervention in the economy and want to reduce the balance sheet, you can offset your operations on the balance sheet by adjusting short-term rates. If this leads to higher long-term rates, you can offset the tightening of financial conditions by lowering short-term rates.” **Warsh was an initial supporter of the Fed's bond-buying program (known as quantitative easing, or QE) during his tenure as a Fed governor from 2006 to 2011, but over time, he increasingly criticized this practice and ultimately resigned due to the Fed's continued bond purchases.** Starting from the emergency measures taken after the global financial crisis to the COVID-19 pandemic, the Federal Reserve accumulated a large amount of U.S. Treasury bonds and other debts to support the economy by maintaining market stability and controlling borrowing costs. ## "Monetary Dominance" In speeches and interviews, Walsh pointed out that the aggressive bond-buying policy was excessive, artificially lowering borrowing rates for too long. This, in turn, fueled Wall Street's risk-taking behavior while encouraging U.S. lawmakers to increase debt, ultimately leading to what he called a "monetary dominance" situation, where financial markets became overly reliant on central bank support. The solution he proposed in a July interview was: "**My simple statement is: reduce money printing, let the balance sheet shrink, and let Secretary Basant handle the fiscal accounts, so that interest rates can be significantly lowered.**" In an interview that same month, he referenced the landmark 1951 agreement between the Treasury and the Federal Reserve, which established the independence of the central bank, and stated that this relationship needs to be redefined. Walsh said, "We need to reach a new Treasury-Fed agreement, just like in 1951. At that time, our national debt was continuously rising, while the central bank and the Treasury were operating independently, and we had to accept such an agreement." He stated that under such a new agreement, "the Federal Reserve Chairman and the Treasury Secretary can clearly and prudently communicate to the market: 'This is our target for the size of the Federal Reserve's balance sheet.'" Reducing the size of the Federal Reserve is not an easy task. If Walsh's appointment is confirmed, he will face a balance sheet that is several orders of magnitude larger than when he last served as a Fed governor. ![2f601c62c0ebce225d5e597dc93b177.png](https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20260202/1769985423514249.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg) **The money market is particularly sensitive to small changes in liquidity within the system.** 2019 was a typical example when the Federal Reserve had to intervene to ease funding pressures, leading to a spike in short-term loan rates. Recently, by the end of 2025, increased U.S. government borrowing, combined with the Federal Reserve's continued reduction of certain assets (a process known as quantitative tightening), led to a decrease in cash in the money market, resulting in a minor but still significant tightening. Shortly thereafter, the Federal Reserve abruptly halted its quantitative tightening policy and began to inject reserves back into the financial system by purchasing short-term U.S. Treasury bonds maturing within a year. The Fed started buying about $40 billion in Treasury bonds each month in December to alleviate the pressure of rising short-term rates. Joseph Abate, head of U.S. interest rate strategy at SMBC Nikko Securities America, wrote in a report to clients on Friday: "As indicated by the funding pressures last fall, the demand for bank reserves depends on regulatory and internal liquidity needs of the banks." **In the nearly two decades following the financial crisis, policymakers have adopted a framework of "ample" reserves.** This framework aims to ensure that there is sufficient cash flow within the banking system, allowing lending institutions to meet regulatory liquidity requirements and settle payments without borrowing from the Federal Reserve. Returning to an environment of reserve scarcity could lead to bank overdrafts, increased borrowing, and significant fluctuations in the size of the Federal Reserve's balance sheet. ## Room for Maneuver Barclays strategists Samuel Earl and Demi Hu believe there is "some room for maneuver" in the Federal Reserve's definition of "ample." **For a potential Federal Reserve Chair like Waller, who wishes to reduce the balance sheet, officials could stop monthly purchases of U.S. Treasuries and allow financing costs to rise, potentially exceeding the Federal Reserve's target range for the federal funds rate.** Barclays suggests another option is to adjust the composition of the Federal Reserve's Treasury portfolio, shifting its holdings towards shorter-term securities that better match its liabilities, rather than long-term debt. Currently, the weighted average maturity of the Federal Reserve's balance sheet exceeds nine years, while the average maturity of its liabilities (including the Treasury General Account, reserves, and foreign exchange) is about six years. Given that Federal Open Market Committee Chair Waller has only one vote on the committee, it remains to be seen how extensively he can implement broad policy changes. Analysts at JPMorgan wrote in a report on Friday that **Waller needs to build consensus, and while some committee members share his concerns, many still support maintaining the ample reserves framework.** BMO Capital Markets analyst Vail Hartman believes that the Federal Reserve's adoption of an ample reserves policy framework makes a policy shift unlikely in the short term. However, he noted in a piece last Friday that the addition of a "balance sheet hawk" to the Federal Open Market Committee should help curb future asset purchases or reinvestment policies. Additionally, Hartman wrote, "A significant reduction in the size of the balance sheet may require major adjustments to the Federal Reserve's existing bank regulatory framework." Even so, traders feel they have been warned. Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, stated, "The current situation remains unchanged, but the market will remain tense until Waller makes a clear statement." ### Related Stocks - [iShares 0–1 Year Treasury Bond ETF (SHV.US)](https://longbridge.com/en/quote/SHV.US.md) - [iShares 20+ Year Treasury Bond ETF (TLT.US)](https://longbridge.com/en/quote/TLT.US.md) - [US Global GO GOLD and Prec Mtl Mnrs ETF (GOAU.US)](https://longbridge.com/en/quote/GOAU.US.md) - [Zijin Mining (601899.CN)](https://longbridge.com/en/quote/601899.CN.md) - [Texas Capital Government Mny Mkt ETF (MMKT.US)](https://longbridge.com/en/quote/MMKT.US.md) - [Global X Gold Explorers ETF (GOEX.US)](https://longbridge.com/en/quote/GOEX.US.md) - [iShares MBS ETF (MBB.US)](https://longbridge.com/en/quote/MBB.US.md) - [PIMCO Mortgage-Backed Securities Act ETF (PMBS.US)](https://longbridge.com/en/quote/PMBS.US.md) - [Janus Henderson Asset-Backed Secs ETF (JABS.US)](https://longbridge.com/en/quote/JABS.US.md) - [iShares MSCI Global Gold Miners ETF (RING.US)](https://longbridge.com/en/quote/RING.US.md) - [Hunan Silver (002716.CN)](https://longbridge.com/en/quote/002716.CN.md) - [WisdomTree Bloomberg US Dllr Bullish ETF (USDU.US)](https://longbridge.com/en/quote/USDU.US.md) - [Janus Henderson Mortgage-Backed Sec ETF (JMBS.US)](https://longbridge.com/en/quote/JMBS.US.md) - [ChinaAMC Gold ETF (518850.CN)](https://longbridge.com/en/quote/518850.CN.md) - [iShares Silver Trust (SLV.US)](https://longbridge.com/en/quote/SLV.US.md) - [abrdn Physical Silver Shares ETF (SIVR.US)](https://longbridge.com/en/quote/SIVR.US.md) - [ProShares Ultra Silver (AGQ.US)](https://longbridge.com/en/quote/AGQ.US.md) - [Sprott Active Gold & Silver Miners ETF (GBUG.US)](https://longbridge.com/en/quote/GBUG.US.md) - [SPDR® Blmbg 1-3 Mth T-Bill ETF (BIL.US)](https://longbridge.com/en/quote/BIL.US.md) - [VanEck Mortgage REIT Income ETF (MORT.US)](https://longbridge.com/en/quote/MORT.US.md) - [ZHONGJIN GOLD (600489.CN)](https://longbridge.com/en/quote/600489.CN.md) - [Invesco DB Precious Metals (DBP.US)](https://longbridge.com/en/quote/DBP.US.md) - [State Street SPDR Port Mortg Bckd Bd ETF (SPMB.US)](https://longbridge.com/en/quote/SPMB.US.md) - [ProShares UltraShort 20+ Year Treasury (TBT.US)](https://longbridge.com/en/quote/TBT.US.md) - [abrdn Physical PrecMtlBsk Shrs ETF (GLTR.US)](https://longbridge.com/en/quote/GLTR.US.md) - [Agnico Eagle Mines Limited (AEM.US)](https://longbridge.com/en/quote/AEM.US.md) - [Sprott Silver Mnrs & Physical Silver ETF (SLVR.US)](https://longbridge.com/en/quote/SLVR.US.md) - [Vanguard Financials ETF (VFH.US)](https://longbridge.com/en/quote/VFH.US.md) - [Federal National Mortgage Association (FNMA.US)](https://longbridge.com/en/quote/FNMA.US.md) - [JHancock Mortgage Backed Sec ETF (JHMB.US)](https://longbridge.com/en/quote/JHMB.US.md) - [iShares MSCI Global Silver&Mtls Mnrs ETF (SLVP.US)](https://longbridge.com/en/quote/SLVP.US.md) - [SD-GOLD (600547.CN)](https://longbridge.com/en/quote/600547.CN.md) - [Vanguard Mortgage-Backed Secs ETF (VMBS.US)](https://longbridge.com/en/quote/VMBS.US.md) - [Kinross Gold Corporation (KGC.US)](https://longbridge.com/en/quote/KGC.US.md) - [Fidelity MSCI Financials ETF (FNCL.US)](https://longbridge.com/en/quote/FNCL.US.md) - [Gold.com (GOLD.US)](https://longbridge.com/en/quote/GOLD.US.md) - [iShares Gold Trust (IAU.US)](https://longbridge.com/en/quote/IAU.US.md) - [abrdn Physical Gold Shares ETF (SGOL.US)](https://longbridge.com/en/quote/SGOL.US.md) - [JPMorgan Mortgage-Backed Securities ETF (JMTG.US)](https://longbridge.com/en/quote/JMTG.US.md) - [DoubleLine Asset-Backed Securities ETF (DABS.US)](https://longbridge.com/en/quote/DABS.US.md) - [SPDR® Gold Shares (GLD.US)](https://longbridge.com/en/quote/GLD.US.md) - [Invesco DB US Dollar Bullish (UUP.US)](https://longbridge.com/en/quote/UUP.US.md) - [Federal Home Loan Mortgage Corporation (FMCC.US)](https://longbridge.com/en/quote/FMCC.US.md) ## Related News & Research - [Americas Gold And Silver Bets Big On Growth](https://longbridge.com/en/news/281666534.md) - [Here's How Much $100 Invested In Federal Home Loan 10 Years Ago Would Be Worth Today](https://longbridge.com/en/news/281543628.md) - [Spot silver rises over 7% to $75.01/oz](https://longbridge.com/en/news/281223133.md) - [05:10 ETBest Gold Investment for Beginners (2026): Priority Gold Named Leading Platform for Gold IRAs and First-Time Buyers by Better Business Advice](https://longbridge.com/en/news/281622297.md) - [Here's How Much $100 Invested In abrdn Physical Silver Shares ETF 10 Years Ago Would Be Worth Today](https://longbridge.com/en/news/281394387.md)